Introduction, Meaning, and Factors of Business Environment


Business Environment means a collection of all individuals, entities and other factors, which may or may not be under the control of the organization, but can affect its performance, profitability, growth and even survival. Every business organization operates in a distinctive environment, as it cannot exist in isolation. Such an environment influence business and also gets affected by its activities.

Salient Features of Business Environment

1. Dynamic: The environment in which the business operates changes continuously because there is a wide variety of factors that exist in the environment, causing it to change its shape and character.

2. Complex: There are many forces, events, and conditions that constitute the business environment, arising from various sources. So, it is a bit difficult to understand the relative influence of a particular factor, on the operation of the organization.

3. Uncertain: Uncertainty is an inherent characteristic of the business environment because no one can predict what is going to happen in the future.

4. Multi-faceted: A single change in the business environment, can be viewed differently by different observers because their perceptions vary.

5. Far-reaching Impact: The survival, growth, and profitability, of a business enterprise, depends largely on the environment in which it exists. A small change in the environment has a far-reaching impact on the organization in different ways.

6. Relative: The notion of a business environment is relative since it varies from one location to another.

Components of Business Environment

The Business Environment is broadly classified, into two categories:

1. Internal Environment: The factors which exist within the organization, imparting strength or causing weakness to the organization, comes under internal environment. It includes:

  • Value System
  • Vision and Mission
  • Objectives
  • Corporate Culture
  • Human Resources
  • Labor Union

2. External Environment: External Environment consists of those factors which provide an opportunity or pose threats to the business. It is further classified as:

  • Micro Environment: The immediate periphery of the business that has a continuous and direct impact on it is called Micro Environment. It includes suppliers, customers, competitors, market, intermediaries, etc. which are specific to the business.
  • Macro Environment: Macro Environment, is one such environment that influences the functioning and performance of every business organization, in general. It comprises of the demographic, socio-cultural, legal, political, technological, and global environment.

All business enterprises, functions within an environment, called as the business environment. An individual business firm survives and grows within the periphery of its environment. A firm is only a part of a big environment, and so there are only a few factors which are under the control of the firm. So, the firm has no other option, but to respond and adapt accordingly. If business persons possess a good understanding of the business environment, they can easily recognize, analyze and react to the forces that affect the firm.

For example, health and safety regulation is an external factor that influences the internal environment of business operations. Additionally, some external factors are beyond your control. These factors are often called external constraints. Let’s take a look at some key environmental factors.

External Factors of Business Environment

Political Factors

Political factors are governmental activities and political conditions that may affect your business. Examples include laws, regulations, tariffs and other trade barriers, war, and social unrest.

Macroeconomic Factors

Macroeconomic factors are factors that affect the entire economy, not just your business. Examples include things like interest rates, unemployment rates, currency exchange rates, consumer confidence, consumer discretionary income, consumer savings rates, recessions, and depressions.

Microeconomic Factors

Microeconomic factors are factors that can affect your business, such as market size, demand, supply, relationships with suppliers and your distribution chain, such as retail stores that sell your products, and the number and strength of your competition.

Social Factors

Social factors are basically sociological factors related to general society and social relations that affect your business. Social factors include social movements, such as environmental movements, as well as changes in fashion and consumer preferences. For example, clothing fashions change with the season, and there is a current trend towards green construction and organic foods.

Technological Factors

Technological factors are technological innovations that can either benefit or hurt your business. Some technological innovations can increase your productivity and profit margins, such as computer software and automated production. On the other hand, some technological innovations pose an existential threat to a business, such as Internet streaming challenging the DVD rental business.

Business Environment’s Influence on the Foreign Direct Investment

Being a foreign investor means starting a company in a totally new business environment. This environment has its legal, tax, judicial system, labor law, revenue administration, etc. We are aware that Montenegro is a country whose economy is very much affected by the percent of Foreign Direct Investment (FDI). The Government of Montenegro remove all the business barriers to attract investors.


The business and regulatory environment are of the utmost importance for investors when considering their decision to invest in a country. Since a stable business environment is a prerequisite for businesses to grow and prosper, it is the Government’s assignment to remove all the business barriers and to make their country as attractive as possible for sustainable foreign investments.

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